New Money - All in or Dollar Cost

[RetirementColdHardTruth]

Simple question: I have a windfall with my company that was just bought out. All up around 250k after taxes has been paid to me. Should I put this new money all in at these levels or DCA into the market over time? I am still 10 years or so out of retirement. This accounts for about 20% of Net Worth. Emergency Fund all funded, no debt, no mortgage, no car payments.

[urn2bfree]

Mathematically the research suggests that lump sum will beat DCA, or my favorite, VCA (Value Cost Averaging) because there is an inherent drag on returns by the money on the side lines that cannot compete with the long term growth in equities. The low returns on cash right now makes this especially true.
Psychologically the answer may be to do DCA or VCA anyway, because in the short term it is quite possible your lump sum investment will go down after you buy before it goes up.

Value Cost Averaging involves 1) picking a time frame to invest-.
2) picking your investment intervals-
3) making an estimate of what return you expect
4)investing whatever amount it takes to bring your portfolio up to the expected return

Example:
you pick a 24 month time frame
time interval every 6 months. This would give 5 investments at 0, 6, 12, 18, and 24 months.
6% return yearly or 3% return expected every 6 months
Invest 1/5 to start or in your case $50,000
6 months later it has grown-by 3% ($51,500) so you put in another $50,000. If it had grown more than 3% reduce your next investment by however much it overshot the expected return. If it has returned less than 3% or lost money, put in enough to bring the total up to $51,500 and then add your planned $50,000. You are putting in more when low and pitting in less when doing well. The theory being that the market will likely reverse the trend sooner rather than later so you are buying more on the dips and buying less at the peaks.
Once you have exhausted your $250,000--return to your regular programming.

[RetireAge50]

Well, stocks double on average every 7 or 8 years so the sooner the better, IMHO.

[jerome len]

I always dollar cost average. If not you could buy in just before a 10 to 40% drop in the market.......on the other hand you could lose out if the market has a big increase in the next few months. What would i do? I'd divide it into ten $25000 pots, place one every month or so and if the market has a big drop double up the next month to $50000. I learned my lesson when a bought a bunch of a nasdeq index fund years ago when it was around 5000....then it dropped, costing me about $10000 of a $15000 investment. To this day I still wouldn't have gotten back to even without counting dividends. So, I love dollar cost averaging......it works for me.

[RunningBum]

Quote:

Originally Posted by jerome len I always dollar cost average. If not you could buy in just before a 10 to 40% drop in the market.......on the other hand you could lose out if the market has a big increase in the next few months. What would i do? I'd divide it into ten $25000 pots, place one every month or so and if the market has a big drop double up the next month to $50000. I learned my lesson when a bought a bunch of a nasdeq index fund years ago when it was around 5000....then it dropped, costing me about $10000 of a $15000 investment. To this day I still wouldn't have gotten back to even without counting dividends. So, I love dollar cost averaging......it works for me.

You lost 67%? That must be about the worst index fund ever. I'm assuming a typo.

Lump sum always makes sense to me. Your Asset Allocation is what protects you against fluctuations. Your money out of the market is no different than mine in the market. If there's a reason for you not to get all of your money in the market according to your AA, there must be the same reason for me to take some of mine out (ignoring tax consequences).

If it'll bother you psychologically, then average in. It's your money and it probably won't amount to much difference at all (and certainly has a chance to do better, just not a 50%+ chance, historically speaking) and if it makes you sleep better, it's worth it.

[RetirementColdHardTruth]

@RunningBum: Light bulb just went on. It should be about AA not market timing. I'll go all in as per my AA. Thanks.

[Animorph]

I'd be tempted to DCA right now, but my stock answer is to do the lump sum. And that's probably the better answer, as RuningBum pointed out.

[pb4uski]

+1 with urn2bfree. While lump sum is theoretically optimal statistically, given we are at or flirting with market highs I would value average in over 12-18 months.

So if it were me I would invest $15k, then a month later add whatever I needed to to bring my balance to $30k, then a month later add whatever I needed to to bring my balance to $45k, and repeat increasing the target $15k a month until the entire $250k is invested. The idea is that if the market does bounce around during the period you buy more when prices are relatively low and less when prices are relatively high. Alternatively you could do it quarterly instead of monthly or over a shorter or longer time period but just jiggling the periodic increase to suit your objectives.

[Chuckanut]

+1

What pb4uski said.

[robnplunder]

10 year horizon? Why not invest all now per your AA, whatever that may be?

[nash031]

I always think that if you have to ask the question, the answer is DCA.

[racy]

Quote:

Originally Posted by nash031 I always think that if you have to ask the question, the answer is DCA.

Agree.
Personally, I'd put it all in and be done. I don't much care what the market is doing day to day, or in fact, year to year. If I was 10 years from retirement and investing for a 30-40 year period of retirement, I wouldn't much care about investing at the best possible time today (or next month, or next quarter,...).

[clifp]

Since it is only 20% of your net worth and you are planning on investing it according to your AA, I'd say put it all in.

On the other hand if your AA is say 60/40 and you want to put in roughly 50K a month over the next 3 months little harm in doing it that way either.

The problem with DCA in my experience is the implementation often goes wrong. "I'll dollar cost average the $150K over the next 12 months". What often find happens in real life is the first couple of payments are made, then the market goes up or you get busy, and you miss a month. The market goes up even more. The next thing you know 12 months have pasted and only $25K has been invested and the market is up 15%. And suddenly its the market is so high I'll DCA 125K over the next 12 months.

So if you really DCA, than set up a automatic program with your broker for one day a month and forget about it.

[LOL!]

This is such a perennial often-asked question, that a thread on Bogleheads tried to cover everything about it. It's pretty good reading:
Bogleheads • View topic - The Final, Definitive Thread on Dollar-Cost Averaging

[seraphim]

I'd put in my AA and rebalance - selling what's doing well to buy what's low. Market may go up it may go down *shrug*. I'm not a market timer. One may guess right, one may guess wrong. With ten years to go...

[RetirementColdHardTruth]

Thanks for all the input. I just executed as per my AA.